Corporate Finance Woolworths Ltd

Question: Discuss about the Corporate Finance for Woolworths Ltd. Answer: Introduction Woolworths Ltd is a prime Australian company publicly listed on the Australian Stock Exchange (ASX) with extensive retail interest throughout New Zealand and Australia. In terms of revenue, it is consider, as the second largest company in Australia after is retail-focused conglomerate Wesfarmers Ltd. In the year 2015, it operates around 3729 stores with a workforce of approximately 197,000 employees in New Zealand and Australia that includes more than 960 supermarkets under the Countdown, Foodtown, Woolworths, and Thomas Dux banners (Woolworths limited, 2015). Core business The core activities of the company comprise of Liquor and Australian Food that also includes procurement of food, petroleum, and liquor products through the brands BWS and Dan Murphy. It has more than 1445 liquor stores and 516 petrol canopies under such brand name. Its New Zealand supermarkets engage in these same activities through 177 countdown supermarkets together with a wholesale functioning that provides additional 60 stores (Woolworths limited 2015). It also operates in General Merchandise that involves procurement of discount general merchandise goods through EziBuy and Big W brands. It also associates itself to hotel businesses and pursues around 330 hotels that involve engagement in providing of hospitality and leisure services inclusive of accommodation facilities, food and alcohol, venue-hiring duties, gaming etc (Long, 2014). Woolworths also operates in home improvement services through its 44 Home Hardware and Timber stores and 58 Masters Stores that include procuremen t of home improvement goods. An estimate of around 395 consumer electronic shops managed by Woolworths Ltd but under the brand names of Tandy and Dicksmith Ltd (Heffernan, 2015). The company also manages the wine market, Langtons, and Cellarmasters.com.au online platforms. In other words, the company pursues online operations for its key trading divisions. Strategic activities Food- Woolworths has been able to invest more than $200 million in 2015 for delivering the price promise made to the customers with internal strategies that depict price parity with Coles. It has further invested an additional 56000 hours per week so that on-shelf and Fresh availability is focused (Beaton, 2015). In order to win the customer experience, an innovative leadership team has been establishing that purposes to implement a customer-led measure (Woolworths limited, 2015). To offer enhanced certainty and transparency for the grocery and food suppliers, Woolworths has made a progress in signing the Australian Food and Grocery Industry Code of Conduct and is the only country to do so (Fuller, 2015). Therefore, the progress regarding its food plans mainly focus on customer-satisfaction. Liquor- In the year 2015, Woolworths has made a progress by consistently developing and gaining market shares across each of its three formats that is The Wine Quarter, BWS and Dan Murphy. The company significantly balances the formats that are The Wine Quarter (Online Direct), BWS (Convenience), and Dan Murphy (Destination) and it has shown developed outcomes. The company through My Dan Murphys, a loyalty program introduced in 2014, effectively engages customers. The company has successfully reinforced the digital platform named as danmurphys.com.au so that it becomes a premier online liquor destination of Australia (Keith, 2012). Petroleum- Woolworths have significantly invested in forecourt developments at more than 326 sites so that customer experience and electronic price boards at around 176 sites can be improved. The company through introduction of various promotional offers has enhanced the sales of merchandise (Jones, 2011). Furthermore, in order to increase the petroleum network profile, the company has opened 14 (net) new petroleum sites and this makes the total ownership of sites to 516. Last but not the least, fuel discounts have been provided to the customers at an additional 11 Woolworths Caltex alliance sites with approximately 103 sites across the country (Woolworths limited, 2015). Chairmans Report In comparison to 2014, Woolworths delivered a 0.1% increase in net profit after tax (NPAT) before significant items of $2.453.3 billion in the year 2015. Moreover, when such significant items are considered, then NPAT decreases by 12.5% to $2146 million in 2015. The company has changed its strategy in 2015 making it more focused towards customers so that long-term shareholder value delivered (Woolworths limited, 2015). Due to variations in Woolworths-Caltex alliance, the net sales declined by 0.2% and it amounted to $60.7 billion. In relation to dividend, the Board has declared a 1.5% increase in dividend per share that amounts to 139 cents. It can be observed from the annual report that financial year 2015 has been very important because various significant variations have been made in the senior management team of the company. The CEO and managing director of the company had given his intention for retiring and in order to find a worthy leader, the company has initiated a global CE O search. Due to such search initiatives, the current Managing Director (Brad Banducci) appointed in February 2015 who was later replaced by Martin Smith, prior general manager of Dan Murphys. Dave Chambers appointed as the director of the companys supermarkets while Pat McEntee appointed as Active Managing Director of New Zealands progressive enterprises. The managing director of Big W (Alistair McGeorge) also left the company and a new one (Penny Winn) was appointed. Even Winn has plans to leave the company by the end of 2015 in order to obtain a non-executive career. Woolworths is facing issues in order to find the managing director for Big W and director of Group Retail Services. Hence, financial year 2015 was a memorable year for Woolworths as various significant changes took place in the year. Although such challenges took place in 2015, yet the employees of the company work very hard so that the customers can be properly served and proper satisfaction of customers will thereb y facilitate in long-term growth and sustainable development (Woolworths limited, 2015). Managing Directors Report It is observable through the managing directors report of Woolworths that despite obtaining a slight increased profit in the year 2015 in comparison to the last year, the company failed to deliver an effective growth that was very shocking and disappointing. Woolworths continues to stay focused for the maximization of their shareholders value and this is the reason they have provided an increased dividend to them. The company has leading positions in the market and hence it provides an era of competition so that new challenges can be encountering (Keith, 2012). It can be observed that the company has been able to tackle such challenges as in Australian Liquor and Food, Woolworths is approximately 30% greater than their nearest competitors are. However, the market environment has changed drastically with due to passage of time because of enhanced competition and relevant shifts in the behavior of customers and therefore adopting old strategies will not be enough to meet the demands of the customers (Woolworths limited, 2015). In fact, Woolworths is trying to make new changes and it is consistently evolving so that new and innovative ways can be found to delight the customers. Woolworths also focuses on its online digital platform that serves more than 29 million customers each week to develop their share of wallet and enhance the experience of customers as a whole. Effective steps like investment of around $200 million for lowering the prices are done in Australian markets. Further, addition of new ranges and changing the format of stores, clearing of more than 80% of non-productive inventory and increasing the online availability of products to more than 28000 so that the reset of Big W can be accelerated. Acceleration of the lean retail model of Woolworths to be capable in competing in the new environment, maintaining of disciplined capital allocation and portfolio management. This will maximize the long-term shareholder value of the company and are being init iated by the company based on the challenges, as these are very crucial for identification of growth potential (Woolworths limited 2015). Corporate Responsibility Report Both globally and domestically, Woolworths is quietly earning recognition and respect for the depth and integrity of its corporate responsibility programs. Even in the year 2013 and 2014, Woolworths Ltd identified as an international leader of food and staple retailing sector in DJSI (Dow Jones Sustainability Indices). From the corporate sustainability report of Woolworths for the year 2015, it can be observed that the company had three prime focuses that is people, planet, and prosperity. People- Woolworths value diversity and purposes to establish an inclusive and vibrant workplace so that their employees can be valued at work irrespective of their age, gender, disability, ethnicity, gender identity etc. In relation to training, Woolworths offers significant opportunities for their employees to establish a career (Woolworths limited, 2015). A combination of learning opportunities used by the company that includes on-the job training, coaching and mentoring etc. In order to establish a safe business, Destination Zero made the companys vision for safety and health. Furthermore, the LTIFR in 2015 reported at 10.51 that are significantly lesser in comparison to 2014. Even during the year, around 1200 sites did not report of any LTIFR. Planet- In order to minimize carbon emissions, Woolworths adopted strategies like redesigning of customer-facing refrigerator cases, use of low greenhouse emitting refrigerants etc. With such policies, an anticipated reduction of more than one million tones delivered. These policies have also saved millions of expenditures for the company that can be reinvested for additional technologies in future (Graham Smart, 2012). For packaging, the review of more than 3000 brand products has been done by the company so that all products safeguarded from the supply chain to the customers. Woolworths also manages waste by increasing recycling rates. Prosperity- In 2015, more than 43000 people joined Woolworths business and due importance is provided to its suppliers by balancing customer value with a fair return for them. As per 2015 advantage report, the aggregate performance of Woolworths stands at sixth position out of 17 rated retailers. Better conditions for the workers are also established through ethical sourcing policy of the company that pursues a compliance audit program especially for the factories creating own brand products of the company (Woolworths limited, 2015). Initiatives taken by the company to invest in charitable organizations and community programs. The pre-tax contributions of the company stands at 0.7% in 2015 and it aims to offer at least 1% of pre-tax profits to the communities (Long, 2014). Key Financial ratio Ratio Formula Woolsworth Limited-2015 Woolsworth Limited-2014 PROFITABILITY RATIO Return on Assets Ratio Net Income 2137.4 = 0.084 8.4% 2458.4 = 0.102 10.2% Total Assets 25336.8 24136.5 Net Profit Margin Ratio Net Income 2137.4 = 0.035 3.5% 2458.4 = 0.040 4% Sales 60679.1 60772.8 LIQUIDITY RATIO Current Ratio Current Assets 7660.9 = 0.836 7106.1 = 0.949 Current Liabilities 9168.6 7489.5 Quick Ratio Quick Assets* 7660.9-4872.2-9.9 = 0.303 7106.1-4693.2-13.2 = 0.320 Current Liabilities 9168.6 7489.5 CAPITAL STRUCTURE Debt to Equity ratio Total Liabilities 14204.8 = 0.561 13611.1 = 0.564 Total Assets 25336.8 24136.5 Equity Ratio Total Equity 11132 = 0.439 10525.4 = 0.436 Total Assets 25336.8 24136.5 Quick assets is taken as current assets- stock prepaid expenses From the above analysis it can be seen that the decline in sales for Woolworths is negligible that is not an area to worry because the operations of the company vary in different years. A similar trend portrayed by the net income of the company, as well as the balance sheet of the company. However, the current assets have shown movement and this can be attributed due to an increment in the current assets of the company. Further the increment in the non-current assets projects that the tangible assets increased stressing on the long-term progress of the company. A vital increment is seen from $17030.4million to $17675.9million. Further, a sharp movement is witness from non-current to current liabilities and it is solely due to increment in the borrowings of short-term scenario and decline in the borrowings pertaining to the long-term (Parrino et. al, 2012). Profitability ratio Return on total assets this ratio indicates the manner in which the assets of the company are use for generating returns. However, the ratio is showing that thee assets were not used in an effective manner and therefore, the management needs to pay attention on it. Net profit margin the net profit margin of the company declined in 2015 and as said, the sales fluctuate every year thereby leading to a drop in the net profit margin. Immense competition from competitor like Wesfarmer and external scenario led to a fall in sales and this affected the net profit ratio (Libby et. al, 2011). Liquidity ratios Liquidity ratio projects the skill of the company in meeting the obligations of the company. The base ratio of current ratio is 2:1 while for the decisive test ratio is 1:1 and a ratio near to it, projects the strong performance of the company in terms of liquidity (Davies Crawford, 2012). Both the ratios has drop and is low that shows there is a liquidity crunch. The management needs to take a proper step to ensure that it is eliminate at the earliest. Capital Structure The capital structure off the company shows that the debt equity surpasses .50 indicating higher proportion of dent while the equity ratio is lower proving that the company has used more of debt as compared to equity (Fields, 2011). It must strive to attain a balanced level of equity and debt. Market performance Ratio Formula Woolsworth Limited-2015 Earnings per Share Profit available for ESH 2146 = Wght No. Of shares 1256.6 Dividend per Share Dividend paid 912 = No. Of shares 1259.8 The market performance is project by EPS and DPS. The above table shows that it has paid dividend and the EPS is good. This projects that as per market performance the company is operating smoothly (Choi Meek, 2011). Value creation The value creation process of Woolworths is done by focusing on strategies that are priorities. The customer value perception determines how a business operates and maintains its status. Low prices, strong supply management, strong resources, partnership, and a strong alliance determine the value creation formula of Woolworths (Sheldon, 2013). The key resource and key process helps the business to flourish. The key process includes regular improvement, promotional activities, initiatives of value chain etc. Product development and enhancement is been the major step when it comes to value creation (Brealey et. al, 2011). Therefore, the company has provided strong performance and never ignored the customers. Through customer satisfaction, it has created a strong market. Conclusion From the overall analysis, it can be said that the performance of Woolworths has been affected by the external circumstances and cutthroat competition. The liquidity position of the company is under trouble and is one of the major areas that need a strong evaluation of the management and rectification at the earliest (Libby et. al, 2011). However, there is a drop in the major ratio that does not go in good favour of the company. Therefore, at the current point of time, it is not feasible to invest in Woolworths as it is facing acute problem. It needs to structure the entire balance sheet by putting up a strong performance. References Beaton, WC. (2015). Harper Review: a mixed basket for Coles and Woolworths. Retrieved September 12, 2016, https://theconversation.com/harper-review-a-mixed-basket-for-coles-and-woolworths-39640. Brealey, R, Myers, S. Allen, F. (2014). Principles of corporate finance. New York: McGraw-Hill/Irwin. Choi, R.D. Meek, G.K. (2011). International accounting. Pearson. Davies, T. Crawford, I. (2012). Financial accounting. Harlow, England: Pearson. Fields, E. (2011). The essentials of finance and accounting for nonfinancial managers, New York: American Management Association. Fuller, D.S. (2015). Consensus among Economists Reviited. Journal of Economic Education , 369-387. Graham, J. Smart, S. 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Retrieved September 12 2016, https://workinglife.org.au/2013/07/10/the-supply-chain-buck-stops-with-the-big-retailers/ Woolworths limited 2015, Woolworths limited Annual Report and accounts 2013, viewed 13 September 2016, https://www.woolworthslimited.com.au/icms_docs/182381_Annual_Report_2015.pdf.